Taking out any kind of loan can be an intimidating experience, but a car loan could be one of the largest amounts of money you ever borrow, next to a mortgage.
That’s why it’s important to know what you’re signing up for and understand your commitments.
To make it easy, we’ve put together this simple guide that outlines everything you need to know about car loan terms and conditions and what to be careful of.
An overview: Car loan conditions
Before we break down the specifics, it’s worth going over the key elements of a car loan:
- Loan amount: Also known as the principal, this is the amount of money you have borrowed to purchase your car. It’s equal to the price of the vehicle, less any deposit you have already paid towards the loan. Your principal decreases as you repay your loan.
- Loan repayments: These are the regular amounts of money you repay on your loan. Repayments contain two elements: the repayment of the principal and the payment of interest on the principal. Failure to make regular payments can damage your credit score and have legal consequences.
- Interest rates: An interest rate is basically the fee you pay your lender to allow you to borrow money. It’s calculated as a percentage of the principal, and can be variable or fixed.
Now that we’ve reviewed the basics, let’s look at different loan types and the terms and conditions you need to be aware of.
Things to keep in mind: Car finance terms and conditions
Fixed vs. Variable rates
When you finance your car purchase, you’ll choose between a fixed-rate and a variable-rate loan.
A fixed interest rate doesn’t change over the course of the loan, meaning your loan repayments will be exactly the same every time.
In contrast, variable interest rates fluctuate in line with the Reserve Bank of Australia’s cash rate, so while your principal repayment amount will stay the same, interest payments will change as the cash rate rises or falls.
There’s no right or wrong choice when choosing a fixed or variable-rate loan. On the one hand, a fixed-rate loan promises predictable repayments throughout your loan. On the other hand, a variable-rate loan could incur drastically higher or lower interest payments, depending on market conditions.
Secured vs Unsecured car loans
You’ll also be able to choose (depending on your eligibility) between a secured and an unsecured car loan.
A secured loan uses the car as collateral, meaning the lender can repossess your car if you fail to repay. Because of this, the loan is less risky for your lender, so you’ll likely receive a better interest rate and lower fees.
Alternatively, an unsecured loan has no collateral, which means that even if you fail to repay your loan, you keep the car (though your lender may sue you). Because this option is much riskier for the lender, it’s usually only available to applicants with a solid credit score, and it comes with higher interest rates and fees
Learn more about secured and unsecured car loans and how to choose the option that’s right for you.
Loan terms
Car loans tend to have terms of three to six years, though it depends on your lender. It can be tempting to choose a loan with a longer loan term because it means your regular repayments are smaller. But remember, a longer loan term also means you’ll be paying interest for longer, which could cost even more in the long run.
Loan features
As well as interest rates and loan terms, you should also compare loan features before choosing a Perth car finance provider.
Some useful features to look out for include:
- Fee-free redraw facility: This means you can have extra money sitting in your loan account that reduces your principal (and interest), but you can access it anytime without incurring a fee. Think of it as a savings account that also reduces your interest payments.
- Fee-free early repayment: Some lenders will charge you a fee for repaying a loan early because it means they’re missing out on the interest they expected to receive from you, while others will welcome the early repayment and charge no such fees.
- Fee-free extra repayments: Similarly, some lenders will allow you to make extra repayments on top of your regular repayments without incurring any additional fees.
Loan fees
Lenders often charge a variety of fees on your loan. Some are one-offs, and others are ongoing. For example, they may charge an initial application or set-up fee, monthly fees for account maintenance, and additional redraw or early repayment charges.
Make sure to compare loan fee structures as well as interest rates when working out the best car loan rates. In doing so, you can make an accurate comparison, rather than deciding based on interest rates alone. One loan may have a more favourable interest rate than another, but its fees and charges could ultimately make it the less favourable option.
Speak to Yes Loans about getting the best car finance rates
At Yes Loans, our experienced brokers will work with you to find a car loan with the best possible terms based on your financial circumstances and car-buying goals.
Contact us today to enquire about Australia-wide and Perth car finance options – we say YES more often.
